How Today’s Rich Families Are Different

A penchant for mobility is the key to building and maintaining intergenerational wealth.

Most Americans want to amass a fortune and pass it down to their children. Only a small subset of the wealthy actually make this dream a reality. Well under a third of Americans today expect to receive an inheritance, and just 5 percent of retirees count inheritance money as a major source of income. But among those who do anticipate an inheritance, nearly 3 in 10 expect to receive over $250,000 in assets, with heirs in the top 7 percent of estates getting about 50 percent of total bequests. This is a category that includes the 22 new billionaires who joined the Forbes 400 list in 2016—more than two-thirds of whom inherited their wealth—as well as five of the 14 youngest billionaires, who also inherited their fortunes.

Inequalities in family wealth are hardly new to the American experience. But to an unprecedented degree, the issue of family inheritance portends political conflict.

High net worth families—those positioned to pass down millions of dollars in assets to their children—are different not only in their means, but also in their outlooks. More so than in previous eras, families who are poised to build and maintain intergenerational wealth are defined by a single characteristic: a penchant for mobility. They are distinct in their willingness to move their livelihoods and their assets in search of opportunity.

The trend of mobility in intergenerational wealth can be seen in three ways: the rise of immigrant wealth, cosmopolitan attitudes of the rich, and the growing importance of transnational succession planning.

Against this backdrop, populists and nationalists may seize the political moment on a wave of class resentment. But in enacting their agenda, they face formidable odds against a financial elite that has the means and the will to leave the country if it turns against their interests.

Immigrant Wealth

Family dynasties invoke images of European aristocrats and Persian Gulf monarchs. To a remarkable degree, however, family wealth accumulation is an American phenomenon. The United States has been the world’s largest economy since the 1870s and experienced seven-fold growth in real per capita income through the 20th century. The world’s wealthiest families are largely those who had the foresight to immigrate to the United States and give their children an opportunity to prosper in the country’s wealth boom. Today, more than a third of the world’s wealth is in the United States. The country has produced:

The phenomenon of immigrant wealth is underscored by the disproportionate gains immigrants themselves have made within the broader “nation of immigrants.” America’s rich is no longer dominated by the progenies of historically ascendant groups. The “Boston elite” of the 19th centuryand the New York and Philadelphia Episcopalian establishments of the early 20th century, which acquired social clout by laying down and building upon roots in particular areas, have seen a steady decline.

In their wake, groups closer to the immigrant experience have enjoyed a precipitous rise. This trend is apparent in subsets of American society that have either acquired significant wealth or are well-positioned to do so. Though small, they represent microcosms of larger immigrant stories that have yielded intergenerational financial success:

Families with Annual Incomes of At Least $100,000: Compared to 29 percent of Unitarians and 25 percent of Anglicans/Episcopalians, 48 percent of Hindus and 35 percent of reform and conservative Jews have family incomes of at least $100,000 a year.

Intel Science Talent Search Finalists: Considered the preeminent science competition for American high school students, 83 percent of finalists in 2016 were children of immigrants. This is an increase from 60 percent in 2004 and 70 percent in 2011. Overrepresented among this group were children whose parents are former H-1B holders and international students.

Law Firms: Relative to the U.S. black population writ large, Nigerians, by one estimate, are overrepresented at top U.S. law firms by a factor of at least seven—a statistic that signifies the advantage that relatively new Americans and their children enjoy within this racial demographic.

Public Venture-Funded Companies: A third of publicly-traded venture-backed companies in the United States between 2006 and 2012 were founded by immigrants, up from just 7 percent before 1980.

The disproportionate financial gains of immigrants and their children illustrate a broader point: trends are favoring those who, by their very nature, are among the most mobile in search of economic opportunity.

Changing patterns of wealth creation are creating a new global class. Citigroup analysts captured this phenomenon in a 2005 report. The authors noted that wealthy countries such as the United States, UK, and Canada have become “plutonomies”—states where “economic growth is powered by and largely consumed by the wealthy few” and where rich consumers have more in common with each other, across borders, than they do with consumers in their own countries.

Citigroup’s prediction—that the plutonomy would continue to swell from “globalized enclaves”—has proven prescient. The Boston Consulting Group expects that wealth held by households with over $1 million will grow by at least 7.7 percent per year through 2018—more than double the rate of segments below $1 million. Ultra-high net worth households are forecasted to gain 6.5 percent of total global wealth by the end of 2018 and households with more than $1 million in private wealth, more generally, are on track to acquire more than half of total global wealth in 2021.

The wealthy are using their clout to create a transnational world order that aligns with their global perspective. Moody’s found in 2009 that the top 10 percent of earners were responsible for 22 percent of American consumer spending—about the same as the bottom 50 percent. The spending power of elites generates demand for goods and services that transform global order.

Case in point is the evolution of the luxury property market, which, to an unprecedented degree has become far-flung and mobile. Half of the world’s ultra-wealthy individuals own at least two homes, and one in ten own five or more properties. The demand for these homes, according to a recent Warburg & Barnes report, is driven not only by the global demands of business; so too does it reflect the desire of the wealthy to send their children abroad for educational and professional opportunities, and to pursue leisure activities regardless of proximity, whether it’s a ski vacation in the Alps or a beach resort in the Caribbean. The favored locations of the wealthy have transformed the world’s most sophisticated cities into a network that, in important ways, has made “alpha cities” as disparate as London, Tokyo and Mexico City more similar and interconnected to each other than to the broader nation-states in which they exist.

Transnational Succession Planning

Regardless of their preferences, global trends are forcing the wealthy to look abroad to ensure that they can preserve their wealth for future generations. For company founders and CEOs with a net worth of more than $25 million, one of their top priorities in pursuing transnational expatriation is succession planning and the preservation of wealth across generations. Indeed, according to Ian Angell, professor emeritus at the London School of Economics, and David Lesperance, perhaps the world’s preeminent advisor on tax-efficient citizenship, diversifying through a “passport portfolio”—a combination of residences, domicile and citizenships—will be “the most important factor” in determining whether or not high net worth families grow their wealth over future generations or go “‘clogs to clogs’ in a single lifetime, let alone three generations.”

The ease with which the wealthy can travel and move their assets is creating an opportunity for countries to attract the world’s most financially successful citizens. This poses a dilemma for governments in a populist era. In order to compete with other high growth-low tax countries, political leaders, especially in democracies, will need to enact far-reaching tax reform for which they lack a popular political mandate.

The United States, for example, is the only country with the exception of North Korea and Eritrea that taxes based on citizenship as opposed to residence. In other words, while American citizens pay U.S. taxes regardless of where they are in the world, citizens of other countries pay taxes on the basis of their residence or connections to a particular country.

Citizenship-based taxation is a compelling deal for those who prize the unique benefits of an American passport, whether it’s unfettered access to U.S. soil or psychological and sentimental attachments to the world’s sole superpower. Increasingly, this is not enough for high net worth families, who prioritize the preservation of wealth across generations. In an emerging world order in which day-to-day luxuries and amenities are accessible in many countries—both in the developed and developing world—the perks of U.S. citizenship are less consequential in maintaining wealth than are a very specific set of tax incentives.

Consider for instance that even Canada, often stereotyped as a high-tax, second-rate version of the United States, in fact offers high net worth immigrants an unusually attractive tax regime. Canada has no estate or gift taxes and requires minimal taxation for wealthy families immigrating to the country during their first five years of residency. Under Canada’s Immigrant Investor Program, immigrants are given a five-year tax holiday for storing investment assets in a trust, which effectively exempts them from taxes on assets they earned before moving to Canada. Nor does Canada have the same onerous disclosure laws on “family offices” and other vehicles through which the wealthy are increasingly managing succession planning. The incentives created by the country’s tax regime has drawn the most families from a diverse array of countries, including China, South Korea, the United Arab Emirates, and Iran.

And Canada is not unique in creating tax incentives for intergenerational wealth. Taiwan, concerned about capital flight to Singapore and Hong Kong, recently slashed its top inheritance tax from 50 percent to 10 percent. St. Kitts & Nevis offers citizenship to individuals willing to make a large property purchase on the island, which means tax-free inheritance.

The fate of the Trump tax plan will be an important indicator of whether or not the United States will remain the world’s leading reserve of intergenerational wealth. The debate over wealthy families is likely to center in particular on the administration’s proposal to eliminate the estate tax, the most progressive part of the tax code.

When the smoke is cleared and realities about the United States’ distribution of wealth are laid bare, Americans will have to cast judgment on a small, mobile, cosmopolitan elite and their preoccupation with extending their wealth and privilege to the next generation.

Greedy or not, the value-orientation of today’s rich is in tension with the egalitarian nature of American society and the cohesion and identity of local communities. Before reaching for the pitchforks, however, Americans will need to consider that “loyalty” is hardly the only choice presenting the rich in a confiscatory society. Today’s wealthy are uniquely situated to take their talents—and their money—beyond America’s shores.

Pratik Chougule is an executive editor at The American Conservative. Follow him on twitter @pjchougule. He can be reached via email at [email protected] Sign up for his email listhere.

It’s notable that the south and south-eastern states have far higher poverty rates than the west and midwest (in general). Is it because the western states are populated by people whose ancestors, the pioneers, valued mobility? Those of us in the midwest and west seem more willing to move when necessity strikes. The vast majority of my western U.S. friends came from somewhere else. In contrast, when I lived in New England, I met a ton of people who had never even left their state.

The Federal Estate (or Inheritance Tax) is the USA’s only tax on wealth. It gathers in only a very tiny percentage of that wealth and yet that is still too much argue conservative organizations like “The Heritage Foundation” which like to call it the “Death Tax.”

No one points out that its real unfairness is that it affects small inheritances and has never been adjusted to inflation. The exemption is currently $5.45 million dollars.

For instance families with farms valued under $20 million dollars are not really wealthy and they should not be subject to federal inheritance taxes. Any estate valued under this figure should be exempt from the “Death Tax” because that is what it becomes at that level. It kills the farm which has to be sold to pay the Inheritance Tax on it. Really wealthy people do not have that problem.

In all fairness the taxation of these kinds of estates should start at much higher levels than it does now and those taxes should be higher than they are now.

But the Question is — why should majority lick to rich guys? The obvious answer (from this article) is — otherwise there will be no GROWTH. But who cares, as all the fruits will be picked by these very guys in any case?

Great post and I agree with much of it. I think, as a nation, should we care to attract high net-worth individuals? Do they truly add more value than subtract? If Bill Gates were French, wouldn’t we still have Windows?

Suppose we were to try a different tax setup. Suppose instead of taxing income and sales, we taxed property. Suppose we taxed the value of land, mineral reserves, shares in corporations and the like. Things that fall upon the wealthy instead of the poor.

Reasonably good insight though it is really the ultra wealthy that are most likely to move out of the country to protect their wealth holdings (likely about the .1% of the population). Frankly we can do (well and in fact much better) without them – this is largely a parasitic and quite destructive population. One proposal that I have been pondering is to simply limit household wealth to 10 million. This is a large number that permits people to live a life of leisure if not luxury as well – assuming prudence in lifestyle to leave an inordinate head start for heirs. Anything beyond 10 million can and should be expropriated for domestic social needs. That coupled with a steeply progressive income tax would go a long way to improving the situation in the US for virtually everyone.

Of course, this article is written by a non-Caucasian/non-Western person. There is nothing wrong with wealth. There is much wrong when the wealthy see themselves above the law and morality of the nation and people in which they reside and when they seek to corrupt that nation’s laws to maintain their wealth. Plus, America was never meant to be life-boat for foreign expatriates or a place to secure their wealth to the detriment of the nation/populace.

Greg says, “Anything beyond 10 million can and should be expropriated for domestic social needs. That coupled with a steeply progressive income tax would go a long way to improving the situation in the US for virtually everyone”.

No it wouldn’t. I have never met a rich person in my life that voluntarily wanted to write out a donation check to the IRS at the end of the year. This is because they should know, better than anyone, how this money would be wasted. Better that they reinvest their capital into new and innovative ventures that leave the world better equipped, more productive and with greater economic opportunities.

This is the consumer mentality. Yes, you’d have your PC to play doomquackebiblestories on. No, you and your kids would not have a reasonable shot to a job at Microsoft. One of those matters far more than the other.

For instance families with farms valued under $20 million dollars are not really wealthy and they should not be subject to federal inheritance taxes. Any estate valued under this figure should be exempt from the “Death Tax” because that is what it becomes at that level. It kills the farm which has to be sold to pay the Inheritance Tax on it. Really wealthy people do not have that problem.

In all fairness the taxation of these kinds of estates should start at much higher levels than it does now and those taxes should be higher than they are now.

Agreed, the inheritance tax needs reform, but remains an appropriate way of clawing back cash hordes from the ultra-wealthy. That said, the inheritance tax probably should exempt certain forms of productive capital–working farms would be one example; family businesses should be another. (As a general principle–inheritance taxes on such things should be deferred until such assets are liquidated, with the liability reducing each year that the asset is held by the surviving heirs).

North Korea does not have citizenship-based taxation. It only taxes its nonresident citizens on income generated in North Korea (like almost all other countries). You may be confusing it with the practice of the North Korean government to send its citizens to work in other countries, where the foreign companies pay the North Korean government directly, which in turns pays a salary to the workers. Of course the government earns a profit, but this is similar to companies who employ contractors, not taxation. North Koreans who are able to leave the country on their own are not taxed by North Korea on their income earned outside the country. Yes, citizenship-based taxation is so bad that not even North Korea uses it. It’s really only the United States and Eritrea.